Tuesday, February 14, 2012

What's going on in Greece

Numerian, one of the most insightful financial bloggers I know, gets to the bottom of the markets' surge in the wake of the Greek passage of the new "austerity" measures:

For now, stock markets are happy because they get their periodic injection of heroin – oops, make that “liquidity” – to keep the game going. The game is the one we have all lived through our whole lives – the one where capitalism continues to grow by taking on more and more debt, until now every country is at the point where only the government is big enough to take on the enormous amounts of new debt necessary to keep paying principal and interest on the old debt. At least some countries are: the United States, the UK, Germany, France. Greece of course lost that privilege several years ago, and now even big borrowers like Italy are allowed into the markets only for very short term maturities.

The game, in short, is about over, choking to death on too much debt, kept on a resuscitator by politicians and central bankers who know the public has no way to stop them from raising trillions of dollars or euros with new bond issues. Only the market can stop an out-of-control debtor. Greece has found that out, Italy and Spain and Portugal are close to finding that out, and the UK and the United States are on the list, being no more virtuous than the Greeks. Once the government can no longer borrow, default in some form is inevitable, and austerity follows. The Greeks have austerity handed to them by the Germans; everyone else will be able to choose their own forms of austerity, as different economic and social forces fight with each other in a country that has run out of borrowing capacity and must live off the taxes it is able to raise.

If the stock market had a long term view, it would think about these things. It would look at Greece as a combination horror story and warning sign. Instead, the stock market lives for the day only, and for now the debt binge continues, and the fix of easy credit is being pumped into the financial system once more. Let the celebrations continue.

Not quite. As Canada discovered in the 1980s you can only borrow to a certain point and then interest rates rise to snuff out all economic activity. Devalue? Ok, when your currency hits 60%, 50%, 40% when do you stop? You have to correct the structural imbalance at some point, hopefully before you destroy the economy. The US has been safe so far because China has refused to decouple the Yuan, preventing a catastrophic rise in prices in the US and around the world.

I've seen 20% mortgage rates. Don't think they can't happen in the US.

Awesome article. I am still amazed how many people assume devaluation is a fix for the debt problem. They have not lived in a country which has devaluated currency significantly. Then you realize that such devaluation translates into impoverishment, and then you see all theory about devaluation is well and good, but does not adjust to reality. So yes, "everyone else will be able to choose their own forms of austerity".

Financial crisis is never an easy thing to go through. In most of occasions the consequences of it affect as social as political life. Even before the crisis there was an unemployment problem in Greece but now the situation has changes into the worse. Lots of Greeks are looking for ways to stay afloat and need to find a steady source of income but it’s easier for those who already have some job experience. For youth it’s much harder to get a decent job because in most of occasions they lack required experience and employees don’t want to hire them. Because of financial crisis many consumers use online loans with no faxing or other lending services to stay afloat and cover at least basic expenses.

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This blogexplores the potential for the transformation of economics and finance through the inspiration of physics and the other natural sciences. If traditional economics has emphasized self-regulation and market equilibrium, the new perspective emphasizes the myriad positive feed backs that often drive markets away from equilibrium and cause tumultuous crashes and other crises. Read more about the idea.

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Physicist and science writer. I was formerly an editor with the international science journal Nature and also the magazine New Scientist. I am the author of three earlier books, and have written extensively for publications including Nature, Science, the New York Times, Wired and the Harvard Business Review. I currently write monthly columns for Nature Physics and for Bloomberg Views.